Stress Test

General Greg Weaver 27 Apr

With a red hot housing market, The Office of the Superintendent of Financial Institutions (OSFI) announced that it intends to raise the current stress test level to 5.25%, or two percentage points above the market rate, whichever is higher.  They plan on implementing the new rules on June 01, 2021. 

The stress test was first introduced in 2018 in an attempt to add some stability to the housing market, but I think increasing the threshold for homebuyers was the wrong step. I don’t believe that making the buffer even larger is the most logical tool to help borrowers and lenders and to cool down the red hot housing market at this time. 

The current stress test level is 4.79%, based on the current average five-year posted rate at Canada’s biggest lenders, as per the B-20 Guidelines. The Bank of Canada lowered its five-year conventional mortgage rate from 4.94% last August, but that has been reversed due to continued sky-high demand in the housing market.  

They are having a comment period that ends on May 7 and OSFI reported that they would communicate the revised B-20 Guideline by May 24. So we will find out then if this new benchmark will be implemented on June 1st. 

I believe that this will boost the current boom in home buying and will accelerate the spring market, with borrowers trying to get in under the June 1 deadline. OSFI’s move will trigger an even hotter spring housing market as demand is pulled forward just as it was before the January 1, 2018 implementation date of the current B-20 ruling. 

This new rule will not impact non-federally regulated institutions like credit unions, mono-lines, and private lenders, and it’s not set to impact insured-mortgage borrowers. The federal government is in charge of mortgage qualification for insured mortgages. CMHC and the finance department could follow OSFI’s lead in tightening qualifying rules for insured loans.

One of the biggest concerns is for new homebuyers, and families trying to get into the housing market. Instead of hiking the stress test the provincial and municipal governments could pursue other measures, like addressing the difficulties new homebuyers face entering the market. Making it harder for investors to participate, in a more strategic way, might be a better way to solve the problem. 

In my opinion, the government should have a role to play with increasing the supply. Creating more homes is the only way of cooling the housing market in a meaningful way. I think that the affordability that exists today, put in place with the original benchmark rate made some sense, but making that buffer bigger does not solve the supply issue that we continue to face.

This graph shows how the new stress test at 5.25% can impact affordability. This example shows a reduction of approximately $20,000 for a gross annual income of $100,000.